Lesson 4 Common Characteristics of Life Insurance Policies

Lesson 4 Common Characteristics of Life Insurance Policies Lesson 4 Introduction p1 (LHE) An interesting difference between life contracts and property and casualty contracts is that the application for insurance becomes part of the contract, along with the policy and any riders. In this section we will study the components of life insurance contracts. Application Premium Contract Provisions Exclusions Riders Surrender/Settlement Lesson 4 Introduction p2 (LHE) Learning Objectives: 1. List the types of premium payments. 2. Recognize the components of life insurance policies: o Application o Conditional Receipts and Temporary Insurance Agreements o Common Contract Provisions o Exclusions and Riders o Provisions regarding dividends, settlement and non-forfeiture and surrender options. 3. Describe life insurance applications, including standardization of forms and how the application is used. 4. Describe what a conditional receipt is used for and what restrictions may be placed on issuing a conditional receipt. 5. Recognize and briefly describe the following common contract provisions of life insurance policies: o Entire Contract Provision o Misstatement of Age and/or Sex Provision o Right to Examine Period o Grace Period for Premium Payment Provision o Incontestable Clause o Suicide Provision o Reinstatement Provisions 58

6. Recognize and briefly describe the following life insurance policy exclusions: o War Clause o Cause of Death Exclusions o Flat Extra 7. Recognize and briefly describe the following life insurance policy riders: o Waiver of Premium Rider o Accidental Death Rider o Guaranteed Insurability Rider o Living Benefit Riders o Payor Benefit Rider o Family Riders o Term Insurance Rider o Return of Premium Rider 8. Recognize the ways that the owners or beneficiaries of a life insurance policy can take payment for accrued cash value and death benefit. 9. Understand the basic tax considerations of life insurance. 59

Lesson 4 Topic A Premium Payment p1 (LHE) Additional Terms and Concepts Lesson 4 Topic A Premium Payment Here are a few terms in this topic that you may wish to note before continuing: Pre-Paid vs. Traditional Premium Payment - Traditional premium payment refers to paying an annual premium in one payment, or by installment. Pre-paid refers to payment of more than one annual premium at a time. "Up-Charge" - Refers to the increment added to an installment premium payment. About Terms: Other important terms will be defined on the topic pages. If you find any terms or concepts that need more explanation, go through the topic once more, and check the glossary. If you still need explanation, contact the course mentor. Lesson 4 Topic A Premium Payment p2 (LHE) Learning Objective: List the types of premium payments. Premium Payment Just like with Property and Casualty, there are a variety of ways to pay the Life Insurance premiums. Individual companies will establish their own preferred payment methods, but we will share with you the most common methods. Premiums can be paid by: Traditional Modes Pre-payment Lesson 4 Topic A Premium Payment p3 (LHE) Learning Objective: List the types of premium payments. Traditional Premium Payment Modes 60

Most life insurance companies prefer payment of the annual premium. There is no up charge when this is done. This normally allows the company to quickly recover the high start up costs of issuing the policies (underwriting, commissions, and administrative costs). If the payor wishes to pay in a mode other than the annual amount, the company charges an up charge based on the mode selected. The following examples illustrate how such up charges may apply when the annual premium is $1,000: Annual One payment of $1,000 Semi annual (Annual X.52) $1,040 in two installments of $520 each Quarterly (Annual X.27) $1,080 in four installments of $270 each Monthly (Annual x.099) $1,188 in twelve installments of $99 each Monthly Bank Draft (Annual X.086) $1,032 in twelve monthly drafts of $86 each Lesson 4 Topic A Premium Payment p4 (LHE) Learning Objective: List the types of premium payments. Pre-Payment of Premiums Some insurance companies may give discounts for prepaying a multiple of the annual premiums (e.g., threeyear prepaid premium). Agents should check with the company and should also be sure to get a legal opinion from the carrier that such lump sum premium payment does not create a current tax liability under present tax laws. Please refer to Lesson 4 Topic A Premium Payment p5 (LHE) to complete the Knowledge Check at this time. 61

Lesson 4 Topic B Components of a Life Insurance Policy Lesson 4 Topic B Components - Application, Conditional Receipts p1 (LHE) Learning Objective: Recognize the components of a Life Insurance Policy. Since a Life Insurance Policy is issued by an Insurance Company, it is a 'legal contract', subject to similar legal requirements and qualifications that you may be accustomed to working with in the Property and Casualty business. However, unlike Property & Casualty, where we can inspect the property we are insuring, we can't really inspect the prospective insureds, as they must qualify medically, and we can't see what they 'look like on the inside'. Therefore, binding authority is handled differently with Life Insurance than in the Property & Casualty business. Lesson 4 Topic B Components - Application, Conditional Receipts p2 (LHE) Learning Objective: Recognize the components of a Life Insurance Policy. Components of a life insurance policy continued. The Application The statement of information given when a person applies for life, health, or disability insurance. The insurance company underwriter uses this information as a basis in determining whether the applicant qualifies for acceptance under the company s guidelines. Applications are attached to and made a part of most individual contracts. Conditional Receipts or Temporary Insurance Agreements A form normally required to be signed by the agent and given to the prospective owner at the time a new application is completed. The issuing of a receipt is subject to individual company rules. Most companies require that the agent collect an initial premium and most usually grant some level of limited coverage, under special conditions, before issuance of the policy. Without a valid conditional receipt and a deposit premium, no coverage is in force until the policy is issued, delivered, and accepted. Life Insurance Contract Provisions While life insurance contracts are not standard contracts, the following provisions are generally part of all life insurance policies: The Entire contract Provision, Misstatement of Age and/or Sex Provision, Right to Examine Period (Free Look), Grace Period for Premium Payment Provision, Incontestable Clause Provision, Suicide Provision and Reinstatement Provision. Life Insurance Policy Exclusions Though the policy has limitations due to the incontestable and suicide provisions, an unendorsed life insurance policy has no exclusions. However, the insurance company may have the right to invoke the policy s war clause in time of war. Additionally, companies may endorse a life insurance policy to add cause-of-death exclusions at the time the policy is issued. 62

Life Insurance Policy Riders A rider is an addition to the life insurance policy that offers additional benefits or changes in benefits not found in a standard contract. Dividends Paid on Life Insurance Contract A dividend is a return of part of the premium to the policy holder. Dividends are based on the company s profits resulting from mortality experience, expense costs, and investment return. Not all life insurance policies pay dividends, and when they do, dividends are not guaranteed. Non-forfeiture or Surrender Options Provisions that the insured cannot lose the equity of a whole life insurance policy. A policyholder can select from three options under the provisions: cash surrender value, extended term insurance, and reduced paid-up insurance. If none is selected, a clause in the policy will stipulate the option that automatically goes into effect, usually extended term insurance. Settlement Options The choices available for the payment of death benefits. The owner can select a settlement option before the insured s death and the beneficiary has no choice but to accept the option on death. If there is no option selected before the death of the insured, the beneficiary has the option to select the method of benefit payment. Lesson 4 Topic B Components - Application, Conditional Receipts p3 (LHE) Additional Terms and Concepts Here are a few terms in this topic that you may wish to note before continuing: Misrepresentation - Intentionally lying and/or concealing information on a life insurance application can be prosecuted as a crime in all states. In addition, policies obtained through fraud may be voided at death. Mortality/Morbidity Tables - Table which shows, for each age, what the probability is that a person will become sick or injured (morbidity) or die (mortality) before his next birthday. Extra Percentage Table - Mortality or morbidity tables showing the extra premium for certain impaired health conditions. Insurance Rider - A special provision that the insurer attaches to a policy to expand or restrict policy benefits. About Terms: Other important terms will be defined on the topic pages. If you find any terms or concepts that need more explanation, go through the topic once more, and check the glossary. If you still need explanation, contact the course mentor. 63

Lesson 4 Topic B Components - Application, Conditional Receipts p4 (LHE) Learning Objective: Describe life insurance applications, including standardization of forms and how the application is used. The application is: A major underwriting tool Life insurance companies rely on the information in the application in the underwriting process. Information is to be supplied by the insured, and the insured must sign the application. If the insured is a minor, however, a parent or guardian can provide the information, and that person will sign the application. A document that contains protected private information The application contains personal information that must be protected. However the company may share certain parts of the application information with the Medical Information Bureau (MIB Group, Inc.). When the insured (or their parent or guardian) signs the application they normally give the life insurance company permission to provide past application information to the MIB and to receive past application information from the MIB. The life insurance company may also be allowed to request personal information from other databases, such as driving and criminal records. A standardized form, subject to state regulation Companies must use applications that comply with state insurance codes. Insurance companies may also adopt additional underwriting guidelines that could include the acquisition of additional medical and/or other personal information in addition to that required on the initial application. These too, must comply with state insurance codes. Amendable, for a new offer A company may amend an application and offer a different policy than the one applied for. This occurs when the applicant does not qualify for life insurance as requested in the application. A new offer by the company normally requires the insured sign a statement acknowledging the amended offer and that information given in the original application, unless noted, has not changed. An insurer that accepts an applicant who does not qualify for a standard policy will usually base the premium for the revised offer on extra percentage tables, which are mortality or morbidity tables showing the extra premium for certain impaired health conditions. Usually, this develops an additional premium based on a percentage of the standard premium, a form of substandard rating. A part of the life insurance contract The life insurance application actually becomes part of the contract, and a copy is attached to the policy when it is issued. Any mistake on an application must be corrected and initialed by the insured, or better yet, a new application completed in its entirety with no errors. 64

Lesson 4 Topic B Components - Application, Conditional Receipts p5 (LHE) Learning Objective: Describe life insurance applications, including standardization of forms and how the application is used. Who Can Complete the Application Life insurance agents, as representatives of life insurance companies, may be involved in the application process. Some companies require the life insurance agent to collect the application information by questioning the insured (parent or guardian) and witnessing their signature on the application. Some companies allow the agent to complete the application based on the applicant s responses to questions, while others want the applicant to actually complete all of the sections of the application in their own handwriting. If involved in the application process, the agent will also be required to sign the application and witness the insured s signature. Lesson 4 Topic B Components - Application, Conditional Receipts p6 (LHE) Learning Objective: Describe what a conditional receipt is used for and what restrictions may be placed on issuing a conditional receipt. Conditional Receipts or Temporary Insuring Agreements During the life insurance application process, a conditional receipt or temporary insuring agreement describes the agreement between the insurance company and the applicant and provide temporary life insurance coverage until the company has issued the policy. Agent s Authority to issue Conditional Receipt is limited Here is where binding authority is different from property and casualty insurance! If the agent accepts money, he/she must provide a conditional receipt or temporary insuring agreement for a limited amount of protection, due to the fact that the agent can t determine if the prospect is healthy and meets the underwriting criteria. 65

Circumstances that may be restricted Examples of situations that may prohibit giving conditional receipts or temporary insurance agreements are situations of known or admitted medical conditions, dangerous jobs and/or hobbies, the age of the insured, the amount of life insurance request, or other adverse underwriting conditions known to the agent and outlined in the company s underwriting guidelines. Temporary agreements on approval basis Generally speaking, if an agent accepts premium payment to submit with the application, some type of conditional receipt or temporary insurance agreement will be issued. If the agent does not collect a premium payment to submit with the application, the application is submitted on a for approval basis, no conditional receipt or temporary insurance agreement is issued, and no coverage until policy issued, accepted and paid for. Lesson 4 Topic B Components - Application, Conditional Receipts p7 (LHE) Learning Objective: Describe life insurance applications, including standardization of forms and how the application is used. Insurability Most conditional receipt guidelines require that the insured must be insurable for the exact insurance applied for when the application is made and that other terms of the conditional receipt must be met before temporary insurance will be provided. Underwriting Requirements The insured may be required to complete underwriting requirements, such as: a medical exam performed by a paramedic or company approved physician, blood work or urine specimen, after which the temporary insurance will take effect. Otherwise, if the insured meets the company non-medical guidelines, then the temporary insurance can begin immediately. Specified Time Limits and Maximum Amounts of Coverage Most conditional receipts will be subject to specified time limits and maximum amounts of coverage. In other words, if all of the underwriting requirements are not completed and submitted to the company for consideration within, for example, 60 days, the temporary insurance expires, and premium deposit is refunded, and generally the underwriting process stops, until the applicant decides to comply and restarts the process. In addition, the temporary insurance coverage amount is the requested face amount on the application but only up to a maximum allowed by that company, and if the requested face is more, the temporary insurance amount is the smaller of the two. 66

Note: Most temporary insurance agreements provide temporary insurance coverage until the company refunds the premium or issues the policy, just as conditional receipts do. Most temporary insurance agreements have beginning and termination dates, special limitations, and maximum amounts of coverage. Since life insurance contracts are not standardized contracts, you should have the expectation that the provisions for conditional receipts or temporary insurance agreements will vary between life insurance companies. Please refer to Lesson 4 Topic B Components Application, Conditional Receipts p8 (LHE) for examples of Conditional Receipt language and Temporary Insurance Agreement language. Please refer to Lesson 4 Topic B Components Application, Conditional Receipts p9 (LHE) to complete the Knowledge Check at this time. 67

Lesson 4 Topic C Life Insurance Policy Common Contract Provisions Lesson 4 Topic C Components - Contract Provisions p1 (LHE) Learning Objective: Recognize and briefly describe the common contract provisions of life insurance policies. Even though Life Insurance policies are not standardized contracts there are certain provisions found in all Life Insurance contracts. The Entire Contract Provision The entire contract clause states that the insurance policy, the policy owner s application that is attached to the policy, and any individual applications of any insured person, constitute the entire insurance contract. This clause also stipulates that no agent has any authority to waive or amend any provisions of the insurance contract. Misstatement of Age and/or Sex Provision Misstatement of age or sex will generally not rescind the policy. Because the insured s attained age of the policy was incorrect, and adjustment would be needed. The face amount of the policy could be adjusted if not enough premium had been paid. Conversely, a premium refund could be made to the payor, if too much premium had been paid to the policy. Right to Examine Period (Free look) The right to examine is inherent in a Life Insurance policy. Most state laws require a minimum of 10 days after the policy is delivered to the prospect, for the prospect to review the policy and decide whether or not they wish to keep it. Grace Period for Premium Payment Provision The grace period is designed to allow the policy to stay in force due to non-payment on due date by the insured. Grace periods are 30 or 31 days, depending on the state. This is required by law. If the insured dies during the grace period, the company will reduce the death benefits by the modal premium ( modal premium amount is based on the mode of payment, monthly, annually etc.). Incontestable Clause Typically, the insurer has 2 years from the date of policy issuance to context the accuracy of information about the insured. After that, a death claim is rarely denied. However, recent case law allows for the possibility of an insurance company challenging payment of a claim in which there was willful and intentional fraud on the part of an applicant/insured that would have affected the company decision to issue a policy during the application process. Suicide Provision Most policies do not provide any coverage if the insured dies by suicide within a minimum time period (typically 1 or 2 years) from the date of issue. In the case of suicide of the insured occurring within the minimum time period, the death benefit would not be paid, but the premium is often refunded. If the insured dies by suicide after that minimal time period, the insurance company will treat the suicide like death from any other cause and pay the claim. 68

Reinstatement Provision Reinstatement allows the policy owner to reacquire the policy after it has lapsed. This provision must meet certain state laws as well as the insurance company requirements. Lesson 4 Topic C Components - Contract Provisions p2 (LHE) Additional Terms and Concepts Here are a few terms in this topic that you may wish to note before continuing: Rescission - Canceling or making the coverage under a policy null and void. Misstatement (vs. Misrepresentation) - Misstatement typically refers to unintentional or minor errors on the application. Misrepresentation typically refers to fraudulent information on the application. Lapse - The termination of an insurance policy, usually due to non-payment of premium. Contestable Clause - A provision in an insurance policy setting forth the conditions under which and the period of time during which the insurer may contest or void the policy. After that time has lapsed, normally two years, the insurer cannot challenge the validity of the contract based on misrepresentations made during the application process. About Terms: Other important terms will be defined on the topic pages. If you find any terms or concepts that need more explanation, go through the topic once more, and check the glossary. If you still need explanation, contact the course mentor. Lesson 4 Topic C Components - Contract Provisions p3 (LHE) Learning Objective: Recognize and briefly describe the common contract provisions of life insurance policies. Entire Contract Clause The entire contract clause states that the insurance policy, the policy owner s application that is attached to the policy, and any individual applications of any insured person, constitute the entire insurance contract. This clause also stipulates that no agent has any authority to waive or amend any provision of the insurance contract. The contract terms can be amended or waived only by an endorsement, requested by the owner and issued by the insurer. This provision prohibits either party from modifying the terms of the contract through other means, such as oral agreements. 69

Right to Examine The right to examine is inherent in a Life Insurance policy. If the prospect received the policy and decides within the right to examine time frame to return the policy to the issuing company, they will receive a full refund of the premium paid. This provision helps the buyer know that what they thought they were buying and what they receive, are the same. The right to examine clause is determined by state statute, often allowing 10 days, beginning the date the owner receives the policy. Lesson 4 Topic C Components - Contract Provisions p4 (LHE) Learning Objective: Recognize and briefly describe the common contract provisions of life insurance policies. Misstatement of Age or Sex Misstatement of age or sex will generally not rescind the policy. All that will happen is that either the premium will be adjusted to the correct amount for the amount of insurance requested, or face amount of the insurance will be adjusted based upon the premium being paid. Generally speaking, misstatement of age and/or sex is not considered material misrepresentation in a life insurance contract. Some states have adopted statutes that allow a life insurance to void the contract for this misstatement only if the correct statement would have prevented the issuance of the policy, but this is not a common practice. For the most part, coverage will still be in force. If the misstatement is discovered before the insured s death The policy is amended to reflect the correct information, and benefit or premium will be adjusted accordingly. This normally results in lowering of the death benefit or increasing of the premium since stating of a lower than actual age is the most common misstatement. If the death benefit amount is maintained, in addition to higher future premiums, the life insurance company would be entitled to earned back premium. If the misstatement is discovered after the insured s death The company will adjust the death benefit to what it would have been had the correct information been given and based on the premium paid. Most of the time this adjustment means a reduction in death benefit, since the stating of a lower than actual age is the most common misstatement. Lesson 4 Topic C Components - Contract Provisions p5 (LHE) Learning Objective: Recognize and briefly describe the common contract provisions of life insurance policies. Grace Period for Premium Payment The grace period is a length of time after the normal due date of a life insurance premium that the policy remains in force if the premium has not been paid. 70

Required by States All states require life insurance companies to provide a grace period of 30 or 31 days (depending on state law) on life insurance policies. Individual companies have extended the grace period for their policies during natural disasters, such as Hurricane Katrina. However, life insurance companies are not required to offer extensions, and how if extensions apply will vary from company to company. Not Free Insurance The grace period is not a period of free insurance. The company treats premiums received during the grace period as received on the due date and future premium due dates fall at their normal time. Interest is not charged on premiums that are received during the grace period. If the insured dies during the grace period without any premium being remitted to the life insurance company, the death proceeds will be paid to the beneficiary, but the company will be allowed to deduct the owed premium from the death proceeds. Policy Lapse If the premium is not received before the end of the grace period, if it is a term policy, the policy lapses. If it is a type of whole life insurance it can be paid at the end of the grace period from any cash value, if a premium loan provision is not included in the contract. Premium Loans Provision This occurs only if there is a cash value available, and the contract includes the automatic premium loan wording. If the premium is not received or paid from a premium loan provision, the policy lapses and a non-forfeiture option is offered to the owner (non-forfeiture is discussed later in this chapter). It should be noted here that Universal Life policies are not subject to this issue as the mortality costs for the insurance component are automatically deducted from the cash value fund as part of its design, and a lapse occurs only if no cash is available. Lesson 4 Topic C Components - Contract Provisions p6 (LHE) Learning Objective: Recognize and briefly describe the common contract provisions of life insurance policies. Incontestable Clause A majority of states require that a provision be included in life insurance policies that make the policy incontestable after a stated period of time, usually two years (depending on individual state statutes). In its simplest form, the incontestable clause provision states that after the policy has been in force for the required period of time, the insurance company cannot challenge the validity of the contract based on misrepresentations made during the application process. The trigger for beginning the contestability period is the life insurance policy issuance date, not the date of the application. 71

A misrepresentation is generally viewed as a false representation of a fact that is made prior to policy issuance, which if the company had known the truth, it would not have issued the exact policy applied for. The intent of the fraud by the insured is not required for a misrepresentation to take place. There is however recent case law that allows for the possibility of an insurance company challenging payment of a claim in which there was willful and intentional fraud on the part of an applicant/insured that would have affected the company decision to issue a policy when applied for. Lesson 4 Topic C Components - Contract Provisions p7 (LHE) Learning Objective: Recognize and briefly describe the common contract provisions of life insurance policies. Suicide Provision Virtually all life insurance policies include some type of suicide provision. This provision states the life insurance company does not have to pay a death benefit if the insured commits suicide within a certain time period following the issue date of the life insurance policy. While most states limit the time for a suicide provision to two years, a few allow one year. If death occurs by suicide within the specified time period and the company successfully denies the claim, most states laws require the insurer to return paid premium, and in some cases, interest on the returned premium. Lesson 4 Topic C Components - Contract Provisions p8 (LHE) Learning Objective: Recognize and briefly describe the common contract provisions of life insurance policies. Reinstatement Provision Some life insurance policies contain a provision that allows for a reinstatement of the policy within a certain time period after it lapses for non-payment of premium. Depending on the company and/or the length of time the policy is out-of-force, reinstatement may be subject to new underwriting and the insured being insurable. The company may require payment of all past due premiums, and some companies may require interest to be paid on the past due premiums as well as repayment of outstanding loans. Reinstatement normally triggers a new incontestability period and suicide period. Please refer to Lesson 4 Topic C Components Contract Provisions p9 (LHE) to complete the Knowledge Check at this time. 72

Lesson 4 Topic D Components of a Life Insurance Policy: Exclusions, Riders Lesson 4 Topic D Components - Exclusions, Riders p1 (LHE) Here are a few terms in this topic that you may wish to note before continuing: Proof of insurability - For life insurance, this means medical exams and other underwriting requirements set by the insurer. Exclusions vs. Limitations - Exclusionary language is designed to preclude coverage under certain circumstances. Limiting language restricts coverage, and may not exclude it entirely. An exclusion may be a part of the contract or attached to the contract by endorsement. About Terms: Other important terms will be defined on the topic pages. If you find any terms or concepts that need more explanation, go through the topic once more, and check the glossary. If you still need explanation, contact the course mentor. Lesson 4 Topic D Components - Exclusions, Riders p2 (LHE) Learning Objective: Recognize and briefly describe the life insurance policy exclusions. Though the policy has limitations due to the incontestable and suicide provisions, an unendorsed life insurance policy has no exclusions. War Clause However, the insurance company may have a right to invoke a policy s war clause in time of war. This clause states that in wartime no death benefit, other than return of premium and interest, will be paid if the insured is killed as a direct result of war-like action. A war clause cannot be added to an existing contract. Such a clause applies to new applications and is generally removed after the war ends. Cause of Death Exclusions Additionally, companies may endorse a life insurance policy to add cause-ofdeath exclusions at the time the policy is issued. Such exclusions are usually reserved for hazardous jobs or sports-related activities like underwater salvage or skydiving. The insured is required to sign an acknowledgement of the endorsement adding the cause-of-death exclusion. Flat Extra Alternatively, an insurer may choose to insure the job or activity and charge an extra premium in addition to the regular premium to cover any extra hazard or special risk. This is commonly referred to as a Flat Extra. 73

Lesson 4 Topic D Components - Exclusions, Riders p3 (LHE) Learning Objective: Recognize and briefly describe the life insurance policy riders. A rider is an addition to the life insurance policy that offers additional benefits or changes in benefits not found in the standard contract, similar to an endorsement in P&C. The following are the most common riders offered by life insurance companies: Waiver of Premium Rider Accidental Death Rider Guaranteed Insurability Rider Living Benefit Riders Payor Benefit Rider Family Riders Term Insurance Rider Return of Premium Rider Not all companies offer all of these riders, and the language of any specific rider can vary between companies. Though companies may include some riders for no charge, most of these riders will produce additional premium charges. Lesson 4 Topic D Components - Exclusions, Riders p4 (LHE) Learning Objective: Recognize and briefly describe the life insurance policy riders. Waiver of Premium Rider This rider states that if the insured becomes disabled, as defined in the policy (most policies require total disability), the company will waive the payment of premiums. Generally speaking, the insured must be disabled, as defined, for a period of time (usually six continuous months) called a waiting period. Once the insured has been disabled for the required period of time, most companies will refund the premium paid during the waiting period. The premium will be waived and the policy remains in force until the insured is no longer considered disabled as determined by a physician s examination, or permanently if so deemed. This rider may have limitations or exclusions if the disability is self-inflicted or begins after the insured reaches a certain age. When this rider is attached to a universal life insurance policy, only the mortality and expense charges may be waived, not the target or actual premium paid. It is necessary to understand exactly what portion of contribution will be waived, based on individual company procedures. Accidental Death Rider This rider provides for the payment of a multiple (two times, or double indemnity, is an example) of the face amount in the event of the insured s death resulting from accidental bodily injury. 74

Normally, accidental death must be caused directly by the accident and be independent of all other causes, and the death must occur within a certain time period (normally from 90 to 180 days) following the occurrence of the accident. Lesson 4 Topic D Components - Exclusions, Riders p5 (LHE) Learning Objective: Recognize and briefly describe the life insurance policy riders. Guaranteed Insurability Rider The guaranteed insurability rider gives the insured options to purchase additional life insurance from the company at specific future intervals without having to prove insurability. If an insured becomes uninsurable after the original policy is issued, this rider could permit the purchase of significant amounts of additional life insurance. These intervals are generally based on the insured s age near the policy anniversary dates, or on life events such as marriage, purchasing a home or having a child near the policy anniversary dates. Example: The insured reaches age 25, 28, 31, 34, 37, and 40. Normally companies do not offer options beyond the insured s age 40. When the insured reaches each of these ages, the company will offer additional life insurance. Acceptance of the additional coverage can be accomplished by signing the request and paying the premiums when due. The insured may decline the additional life insurance option. If the insured declines a regularly scheduled option when it is due, the option will no longer be available, but the insured will still have the remaining future options. Lesson 4 Topic D Components - Exclusions, Riders p6 (LHE) Learning Objective: Recognize and briefly describe the life insurance policy riders. Improving Coverage after a Life Event 75

1. The insured marries at 26. She can use the age 28 option because of this life event, and purchase additional life insurance at age 26. The next regular option would then occur at age 31. 2. If the insured buys a house at age 27. The age 28 option has already been used so the age 31 option is the alternative for that life event. The next regular option would then occur at age 34. 3. The insured has a child at age 28 and the next regular option will still be at age 34. In our example, the maximum number of options an insured could take would be six. Lesson 4 Topic D Components - Exclusions, Riders p7 (LHE) Maximum Each Option Date The type of life insurance issued will be the same or equivalent type the insured has in place. Issue Age The premium will be based on the insured s attained (actual) age at the time an option is taken The amount of insurance available for purchase at any one option period will be stated in the rider. *If the insured exercises this option to purchase additional insurance coverage, the insurer generally issues a separate life insurance policy, triggering a suicide provision clause for the new policy. *A guaranteed issue policy may not allow additional riders without proof of insurability. Please refer to Lesson 4 Topic D Components Exclusions, Riders p8 (LHE) to complete the Knowledge Check at this time. Lesson 4 Topic D Components - Exclusions, Riders p9 (LHE) Learning Objective: Recognize and briefly describe the life insurance policy riders. 76

Rider Options If the insured is 21 when the original policy is issued, and he takes advantage of each opportunity to buy additional insurance each time, how much will he have by age 40 when all the options expire? This rider offers the potential of purchasing a total of $230,000 of life insurance (the original face amount of $50,000 plus six $30,000 policies), even if a disability caused permanent uninsurability. $30,000 X 6 =$180,000 + $50,000 face value of the policy = $230,000. Lesson 4 Topic D Components - Exclusions, Riders p10 (LHE) Learning Objective: Recognize and briefly describe the life insurance policy riders. Living Benefit Rider These riders allow benefits to be paid on all life insurance policy while the insured is still living. A specific set of circumstances must occur before a benefit is paid. When is the Rider used? Examples might include the insured being: Diagnosed with an irreversible medical condition or illness for which death is likely to occur within a specific time period (generally one year); Diagnosed with a chronic medical condition that would greatly reduce the insured s expected life span unless a medical procedure such as a major organ transplant or installing a heart pacemaker is performed; Accelerates Payment of Death Payment If a term insurance policy includes a living benefit rider, the insured generally has to qualify for the benefit while at least two years remain on the term. Up to 50% of the death benefit may be paid to the insured/owner subject to the contract provisions. Contract Language Varies by Company The language for these riders varies greatly between policies. Not all life insurance policies will provide living benefits for all the examples cited, and some policies may not contain any living benefit rider. If a policy was issued without a living benefit, the owner may be able to ask the company to add one to the existing policy. If the company agrees to add a living benefit rider, a copy of the form should be attached to the policy. Lesson 4 Topic D Components - Exclusions, Riders p11 (LHE) Learning Objective: Recognize and briefly describe the life insurance policy riders. 77

Characteristics of Living Benefit Riders Premium or Administrative Charge Some companies charge a premium for living benefit riders, and some do not. Some companies may charge an administrative fee (for example, $150) to process a claim for a living benefit. Parties to the Contract: Owner is not the Insured If the insured is not the owner of the insurance policy, the company will normally require the written permission of the owner before paying a living benefit. Also, written permission will be required from an irrevocable beneficiary or collateral assignee before a living benefit will be paid. Benefit Amount: Amount of Life Insurance Normally, the rider indicates that the amount an insured may collect under a living benefit rider is limited to a specific dollar amount ($300,000 as an example) or a percentage of the face amount (80 percent), whichever is less. Tax Treatment of the Benefit Payment Recent tax law adjustments treat any accelerated benefit to be the same as a death benefit, therefore, it remains un-taxable. Also, if the insured receives an accelerated benefit and then recovers their health, the money advanced is treated as though it were part of the death benefit, it remains un-taxed as long as the policy remains in force. At death, the death benefit of the policy is reduced by the amount accelerated. Lesson 4 Topic D Components - Exclusions, Riders p13 (LHE) Learning Objective: Recognize and briefly describe the life insurance policy riders. Living Benefit Riders can also be called Accelerated Benefit Riders. The following is a sample form: Sample Accelerated Benefit Rider Statement A. Acceleration Conditions The accelerated benefit rider allows you, while the policy is in force and not within two years of expiry, to elect an acceleration of the death benefit under the policy and any term insurance rider that is less than two years prior to expiry. The benefit is available if the insured has an irreversible medical condition that can be expected to result in the insured s death within twelve months. B. Accelerating Options One benefit for each insured may be paid under the accelerated benefit rider. An accelerated benefit will be paid to the owner in a single sum unless we agree otherwise. You may accelerate all or part of the eligible death benefit, subject to a $2,500 minimum benefit and a $500,000 maximum benefit on all policies issues by us. We reserve the right to limit this maximum amount if the policy is reinsured. The face amount of the policy or rider that will remain after a partial acceleration must be at least the minimum face amount required for the policy or rider. The amount accelerated will be discounted for twelve months interest and will be reduced by 78

any outstanding policy loan, if not otherwise paid, multiplies by the percentage of the eligible amount which is accelerated. C. Premium for Accelerated Benefit Rider There is no premium charge for the accelerated benefit rider. D. Administrative Expense Charge An administrative fee of up to $150 may be required with a request for the accelerated benefit. E. Other Acceleration Conditions (1) No benefit is available if an insured s irreversible medical condition results from a selfinflicted injury and such injury occurs within a two-year period following the policy date. If such injury occurs beyond such period, the amount that may be requested with respect to such insured may not include any part of the death benefit that was first effective within such two-year period prior to such injury. (2) The payment of the accelerated benefit must first be approved in writing by an irrevocable beneficiary and any collateral assignee. Lesson 4 Topic D Components - Exclusions, Riders p13 (LHE) Learning Objective: Recognize and briefly describe the life insurance policy riders. Additional Riders Payor Benefit Rider The rider may be added to a life insurance policy insuring the life of a juvenile. If the payor (the one paying the premium) dies or becomes totally disabled prior to the juvenile s reaching a specified age (generally between age 18 and 25), subsequent premiums that are due are automatically waived until the insured reaches said age. Family Riders These riders allow the purchase of term insurance for the spouse and/or children of the insured. Generally, insureds may purchase them in units of coverage (example: 1 unit equals $5,000 coverage for spouse and $1,000 for each child). Many allow for the future conversion to some type of permanent life insurance without evidence of insurability under specific conditions. Term Insurance Rider This rider provides an additional amount of temporary coverage, which may be attached to an existing permanent policy for a specified period of time. Normally, the insurance company offers this option when the policy is originally issued. Return of Premium Rider When this rider is attached to term life insurance products, the policy owner is returned the premium paid if the insured outlives the term. One of the biggest disadvantages of term insurance is that it is designed to expire before the insured dies. With this rider, if the policy is kept in force for a specified time period, the life insurance company will return some or all of the premium paid. One thing that can be considered a negative is that this rider can increase the standard premium by 25% to 50% for the entire length of the policy term. 79

Please refer to Lesson 4 Topic D Components Exclusions, Riders p14 (LHE) to complete the Knowledge Check at this time. 80

Lesson 4 Topic E Dividend Payments to the Policy Owner Lesson 4 Topic E Components -Dividend, Non-Forfeiture, Settlement p1 (LHE) Learning Objective: Recognize the ways that the owners or beneficiaries of a life insurance policy can take payment for accrued cash value and death benefit. A dividend is a return of part of the premium to the policyholder. Dividends are based on the company s profits resulting from mortality experience, expense costs, and investment return. Not all life insurance policies pay dividends, and when they do, dividends are not guaranteed. Mutual life insurance companies (those owned by the policyholders) generally pay dividends Stock life insurance companies (those owned by stockholders) generally do not pay dividends to policy owners. Lesson 4 Topic E Components -Dividend, Non-Forfeiture, Settlement p2 (LHE) Additional Terms and Concepts Here are a few terms in this topic that you may wish to note before continuing: Participating Policy - A policy providing for the payment of dividends is known as participating. Because the company only pays dividends if the board of directors authorized such payments, dividends are not guaranteed. Non-participating Policy - In a non-participating policy, the premiums, cash surrender values, and death benefits are determined at policy issue and cannot be altered after the policy is issued. The company assumes all risk of future performance. Non-participating policies do not pay dividends. Automatic Surrender or Non-Forfeiture Option - Typically insurers give owners a number of policy surrender options and have an automatic option in place should the owner fail to choose any of the given options. About Terms: Other important terms will be defined on the topic pages. If you find any terms or concepts that need more explanation, go through the topic once more, and check the glossary. If you still need explanation, contact the course mentor. 81

Lesson 4 Topic E Components -Dividend, Non-Forfeiture, Settlement p3 (LHE) Learning Objective: Recognize the ways that the owners or beneficiaries of a life insurance policy can take payment for accrued cash value and death benefit. Dividend Options If a participating policy pays a dividend, the policy owner normally has several choices on how to receive the dividend. 1. Pay Directly to the Owner The dividend payment can go directly to the policy owner. Since dividends are considered overpayment of premium, cash payments are not normally subject to income tax. 2. Pay Down the Premium The policy owner can use the dividend to reduce the current premium on the life insurance policy. With this choice, the gross premium minus the dividend becomes the net premium due at each payment date. 3. Hold in an Interest Bearing Account The policy owner can allow the life insurance company to deposit the dividend into an interest bearing account. The dividend is not taxable, and interest that the account earns is taxable in the year credited. 4. Purchase Paid Up Insurance The policy owner can use the dividend to purchase a small amount of paid-up life insurance on the insured. No future premium is ever due on this paid-up life insurance. Over a period of time, these paid-up additions can add significant dollars to a death claim. 5. Buy Term Insurance The policy owner can use the dividend to purchase an amount of one-year term insurance on the insured. The death benefit on this term insurance will be larger than the paid-up benefit, but since it is term insurance the insured must die before the term expires, or no death benefit will be paid. Lesson 4 Topic E Components -Dividend, Non-Forfeiture, Settlement p4 (LHE) Learning Objective: Recognize the ways that the owners or beneficiaries of a life insurance policy can take payment for accrued cash value and death benefit. Three Main Non-Forfeiture or Surrender Options This feature allows the policy owner to receive the cash value of a life insurance policy when surrendering the policy, or if the policy lapses for non-payment of premium. The company generally offers the policy owner the following three choices. If the policy owner fails to select a choice, the policy will trigger an automatic non-forfeiture option. 1. The owner can surrender the life insurance policy and receive a check from the company for the cash value. Any amount in excess of the premiums paid would be taxable. 82

2. The owner can use the cash value to purchase a single-premium, paid-up life insurance of the same type as the original policy. This paid-up policy will be for a reduced amount of insurance. 3. The owner can use the cash value to purchase extended term insurance for the face amount of the policy, with premium based on the insured s attained age. This extended term insurance is often the automatic option that is triggered if the owner fails to notify the company. The reason is that term insurance is designed to expire before the insured dies. Lesson 4 Topic E Components -Dividend, Non-Forfeiture, Settlement p5 (LHE) Learning Objective: Recognize the ways that the owners or beneficiaries of a life insurance policy can take payment for accrued cash value and death benefit. Table of Non-Forfeiture Values Life insurance policies with cash values will have a table of non-forfeiture values included in the contract language. This table will give the policy owner an idea of what the guaranteed non-forfeiture values would be at the end of each policy year. The actual values could be different if the cash value grew due to dividends applied. Please refer to Lesson 4 Topic E Components -Dividend, Non-Forfeiture, Settlement p5 (LHE) to view a sample non-forfeiture table. Lesson 4 Topic E Components -Dividend, Non-Forfeiture, Settlement p6 (LHE) Learning Objective: Recognize the ways that the owners or beneficiaries of a life insurance policy can take payment for accrued cash value and death benefit. Settlement Options If the life insurance policy is in force when the insured dies, a death benefit will be paid to the beneficiary. Simply stated, settlement options are the manner in which the death benefit can be paid to the beneficiary. The policy owner can select the settlement option to be paid, if they do so before the insured dies. If the policy owner has not selected a settlement option before the insured dies, the beneficiary will get to select the settlement option. 83